Wells Fargo & Company (WFC -0.56%), with shares up more than 80% in the past 12 months, has been one of the biggest gainers in the entire financial industry. The move was so big, in fact, that it may be intimidating; the stock somehow feels ripe for a wave of profit-taking. And that may well be what's in the cards.
If the only thing holding you back from a purchase of this stellar stock is the sheer size of its recent run-up, though, don't sweat it. Go ahead and buy it. There's still plenty of room for it to run.
Against the odds
Of all the stocks in the banking industry, this one would have seemed to be the least likely to log such an impressive gain during this particular period. Wells Fargo is, of course, the institution that the Consumer Financial Protection Bureau busted back in 2016 for opening millions of unauthorized customer accounts. While that was six years, more than $3 billion in fines, and one chief executive officer ago, it's the type of scandal that can stick with a company for years. When consumers were surveyed, they said they trusted Wells Fargo less than any other major bank in the wake of the fraudulent account debacle. And that's not even to mention the additional customer-abuse scandals that came to light at the bank after that first one: overcharging small business owners on credit card fees; improperly repossessing the cars of those in the U.S. military; and abusive practices in its mortgage and auto-loan businesses, among others.
Image source: Getty Images.
It turns out that people appear to have forgiven and forgotten more quickly than one might expect. As of the end of 2021, the bank boasted 6.5% more in customer deposits than it did a year earlier, and credit card revenue was up 3% year over year. Overall, its fourth-quarter net income was up both sequentially and on a year-over-year basis.
So much for the "I'm never banking there again" mindset.
Don't be surprised if its metrics continue to improve. While the combination of soaring home prices and rising interest rates is likely to dramatically curb demand for mortgages this year -- the Mortgage Bankers Association predicts loan originations will fall from nearly $4 trillion in 2021 to $2.6 trillion for 2022 -- home loans aren't the only way Wells Fargo makes money. Higher interest rates also make its checking and savings accounts and its credit card business more profitable.
To this end, although the analyst community still anticipates that Wells Fargo's revenue and earnings will decline in 2022 after last year's gains, both the top and bottom lines are expected to start trekking higher again through 2025.
Data source: Thomson Reuters. Chart by author.
An anticipated multiyear streak of interest rate hikes by the Federal Reserve will at least support the profit-growth portion of this outlook.
By the numbers
But surely Wells Fargo is still struggling to dig its way out of the hole that it put itself in with all that reputational damage, which will limit how much it can feasibly earn ... right?
Actually, that's not the case either.
Wells Fargo is as profitable as it should be, for starters. Its 2021 return on equity was 12% -- on par with Bank of America (BAC -0.13%), and better than Citigroup (C -0.32%). Wells' efficiency ratio of 69% is likewise comparable to Bank of America's and Citigroup's, both of which came in at 67% last year (lower is better).
The point is, from an operating standpoint, Wells Fargo looks a whole lot like its big bank peers.
The stock is valued just as fairly as its competitors' stocks, too. Even after that big 2021 run-up, Wells Fargo shares are priced at less than 12.2 times earnings, and around 15 times projected forward earnings. Both of those multiples are lower than the comparable measures for Bank of America, and while Wells' trailing dividend yield of 1.7% may be a bit below the industry's average, bear in mind that this includes a severe reduction in its quarterly payout. The 25% increase the bank announced for its upcoming dividend payment suggests the bank is serious about getting back to its pre-pandemic payout levels in the foreseeable future. They could double again en route.
There's also no doubt the bank could afford such dividend hikes. In 2019, its total payout of $2.94 per share was less than 60% of last year's earnings per share of $4.95. And, while analysts are collectively forecasting a slight earnings dip this year, remember -- these same analysts only expected Wells to produce half as much profit as it actually delivered in 2021. They could be underestimating it again.
Bottom line for Wells Fargo
This big bank and its stock are not immune to market-wide or macroeconomic headwinds, and we don't know for sure what 2022 holds in store for the banking business. The economy, the pandemic, and politics are all ever-changing factors. Anything could happen during the course of the next few months -- including a period of profit-taking on this recently high-performing stock.
Given the modest visible risks though, Wells Fargo is still a name worth owning despite its above-average bullishness of late. There's plenty of reason to expect the stock to make further gains.
